Avenue Supermarts

Offers good investment avenue

The company's business model has worked very well in a growing value retailing business

CM RATING

65/100

Promoted by Radhakishan S Damani and incorporated in 2000, Avenue Supermarts (AS) is an Emerging National Supermarket Chain, with focus on value-retailing. According to Technopak, in FY 2016, the company was one of the largest and the most profitable F&G retailers in India.

The company's stores operate under the "D-Mart" brand, registered as a trademark under various classes of products. The company offers a wide range of products with a focus on the Foods, Non- Foods (FMCG) and General Merchandise & Apparel product categories.

As of January 31, 2017, AS had 118 stores with retail business area of 3.59 million sq ft, located across 45 cities in Maharashtra (59 stores), Gujarat (27), Telangana (13), Karnataka (7), Andhra Pradesh (4), Madhya Pradesh (3), Chhattisgarh (1) and NCR (1), Daman (1) and Rajasthan (2). In the nine months ended December 31, 2016, Maharashtra contributed a majority of the revenues from sales (58.84%), followed by Gujarat (18.08%), Telangana (11.45%), Karnataka (7.01%) Andhra Pradesh (2.52%), Madhya Pradesh (1.35%), Chhattisgarh (0.50%), NCR (0.12%), Daman (0.09%) and Rajasthan (0.05%).

A Majority of the company's stores are located in the western part of India. The company intends to further enhance their position in the retail supermarket business in Maharashtra and Gujarat by increasing their market penetration and expanding the store network in these states. The company also has plans of expanding its store networks in South and Central India.

The company operates predominantly on an ownership model (including long-term lease arrangements, where lease period is more than 30 years and the building is owned by the company) rather than on a rental model. AS operate distribution centres and packing centres that form the backbone of their supply chain to support their retail store network. As of September 15, 2016, it had 21 distribution centres and 6 packing centres in Maharashtra, Gujarat Telangana and Karnataka. The company typically follow an attractive pricing strategy for all their products, relying on the strong supplier network, efficient supply chain management for procurement and careful product assortment.

The company stocks everyday products forming part of basic rather than discretionary spending. In the nine months ended December 2016, food categories accounted for around 52.8% of total sales, non- food (FMCG) category 19.8% and rest (general merchandise and apparels) around 27.6%.

The Offer and the Objects

The issue comprises fresh issue of shares of Rs 1870 crore. At the lower price band of Rs 295 per share, the issue works out to an issue size of 6.34 crore shares and at the higher price band of Rs 299 per share, the issue size is 6.25 crore shares. The minimum bid lot is 50 equity shares and in multiples of 50 equity shares. The issue is made through the book-building process and will open on 8 March and will close on 10 March, with anchor investor bidding date of 7 March 2017.

The objects of the issue are prepayment or repayment of portion of loans and redemption or early redemption of non-convertible debentures (NCDs) of Rs 1080 crore, construction and purchase of fit-outs for new stores of Rs 366.60 crore and rest around Rs 423 crore for general corporate purpose apart from the benefits of listing the equity shares on BSE and NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.

Strengths

Increasing urbanization, working women and young demography of India augur well for the business.

The F&G category is the fastest growing category among the modern retail trade. Organized retail penetration in foods and grocery is only 3%, giving ample scope for further penetration by organised players and policy measures like demonetisation, goods & services tax (GST) will augur well for the sector.

AS registered same stores (operational for at least 24 months) sales growth of around 26% for FY 2016, 22% for FY 2015 and 21% for FY 2014. The consolidated revenues recorded compounded annual growth rate (CAGR) of 40% from Rs. 2208.56 crore in FY 2012 to Rs 8588.12 crore in FY 2016. PAT has registered a CAGR of 51% from Rs.60.40 crore in FY 2012 to Rs.318.76 crore in FY 2016.

The majority of the products stocked by the company are essential products forming part of basic rather than discretionary spending due to which the business is not materially affected by seasonality or temporarily depressed macro-economic conditions.

AS expands presence through cluster approach. It has strengthened existing presence in certain regions by opening new stores within a radius of the existing stores and distribution centres, leading to increased penetration and presence in under-served markets, higher cost-efficiency due to economies of scale achieved in the supply chain and inventory management, and greater and concentrated brand visibility due to focused implementation of marketing and advertising initiatives.

The company remains focused on individual store profitability and not on store expansion alone. Based on the past track record, it takes around two years for a new store to reach Ebidta of 5% and management continues to focus on that store till the Ebidta reaches 15%. Not a single store has been closed till date as it takes lot of care before opening new store.

The company looks at retail opportunity on a state-level basis and not on a city-level basis. Every year, around 75% of new stores are opened in existing market and rest in new market.

Despite consistent store additions, the company's debt: equity ratio remained stable (stood at 0.7times in FY2016). Further, with repayment of loans from the net proceeds of the offer, the company's debt will come down further.

The company focuses on high turnover and fast turnaround of inventory. The fixed asset turnover ratio for FY 2016 and nine months ended December 2016 stood at 3.95 and 3.46. The inventory turnover ratio for FY 2016 and for the nine months ended December 2016 stood at 11.56 and 14.18.

Weaknesses

The company's focus is on value retailing. Any FDI-backed online or offline aggressive competition can affect its business prospects.

High concentration of business is in two states. Maharashtra accounts for 59% of the total revenues and Gujarat around 18%. Any adverse development such as natural calamity, social, political and economic in these two states can have a material impact on the financials of the company.

The company now will be expanding in the southern and central markets. New stores in these new geographies may not fetch same returns of the past or may take higher time in terms of achieving the threshold Ebidta level that the management generally achieved in the past.

The company's business is man-power intensive and attrition rate is high. A majority of workforce of company is on contract basis. Any adverse changes in labour law or unionization can lead to increase in cost and change in the current cost structure of the company.

The company has negligible presence in e-tailing, where it has presence through associate company Avenue E-commerce. Going forward, the management does not intend to focus on this business line. The e-tail market is currently around US $ 14 billion in India, which is 2% of the overall retail market and is expected to be 6% of the overall retail market by 2020

Valuation

For FY 2016, consolidated net sales were up 33% to Rs 8588.12 crore. The OPM increased 60 basis points to 7.7%, thus leading to a 45% increase in OP to Rs 663.48 crore. Other income was lower by 1% to Rs 17.99 crore. Interest costs stood at Rs 90.82 crore up by 26% and depreciation was up by 21% to Rs 98.43 crore, leading to a 52% increase in PBT to Rs 492.22 crore. After providing total tax of Rs 171.62 crore, and MI of Rs 1.84 crore, consolidated PAT for the 12 months ended March 2016 stood at Rs 318.76 crore, up 51% YoY.

For the nine months ended December 2016, net sales stood at Rs 8784 crore with the OPM of 8.8%, leading to OP of Rs 769.68 crore. Interest cost and depreciation stood at Rs 90.82 crore and Rs 91.92 crore, respectively, leading to a PBT of Rs 606.28 crore. After providing total tax of Rs 213.35 crore and MI and share of profits from associates of Rs 5.19 crore, consolidated PAT for the nine months ended December 2016 stood at Rs 387.74 crore.

On a higher price band of Rs 299, the diluted equity share capital of the company stands at Rs 624 crore of face value of Rs 10 each. EPS for FY 2016 works out to Rs 5.1. EPS for the nine months ended December 2016 on an annualised basis works out to Rs 8.3 for FY 2017. The scrip is offered at P/E multiple of around 58.5 times FY 2016 earnings and around 36.1 times nine months annualised earnings for FY 2017.

Trent and Future Retail are among the organised listed peers of AS. While the focus of Trent is more on apparels and fashions, for the nine months ended December 2016, the company reported net sales of Rs 1256.80 crore, with PAT of Rs 81.60 crore. For FY 2016, the company reported net sales and PAT of Rs 1461.57 crore and Rs 77.85 crore. This gives an EPS of Rs 2.3 for FY 2016 and EPS of Rs 3.3 annualised for the nine months ended December 2016 for FY 2017. At the current market price of Rs 240, Trent is trading at around 102 times FY 2016 earnings and 73.3 times FY 2017 earnings arrived at by annualising nine-month earnings for the period ended December 2016.

Future retail reported net sales and PAT of Rs 12342 crore and Rs 245.23 crore, respectively, for the nine months ended December 2016. On an annualised basis, this gives an EPS of Rs 6.9 for FY 2017. The stock is trading at around 36.1 times its annualised FY 2017 earnings.

AS has been following a unique business model of owning stores compared with rentals followed by peers. While this has led to higher capex for AS, its ROE and ROCE have been higher at around 15% and 10%, respectively, compared with the industry average of around 7% and 5%, respectively.

Avenue Supermarts: Issue highlights

 Avenue Supermarts: Consolidated Financials